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Thursday,  Jun 29,2017,15:53 (GMT+7)

Expanding trade deficit puts pressure on forex rate

The Saigon Times Daily
Monday,  May 15,2017,23:34 (GMT+7)
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Expanding trade deficit puts pressure on forex rate

The Saigon Times Daily

A bank teller counts U.S. dollar bills. The widening trade deficit has pushed up the demand for U.S. dollars, thus piling huge pressure on the foreign exchange rate - PHOTO: THANH HOA

HCMC - The widening trade deficit has pushed up the demand for U.S. dollars, thus piling huge pressure on the foreign exchange rate, says a report in Lao Dong newspaper.

With the Fed plan for some more interest rate hikes in years to come, the foreign exchange rate may come under considerable pressure, said experts of the National Financial Supervisory Commission (NFSC).

NFSC analysts predict there would be more pressure on the exchange rate in 2017 as the demand for the greenback will rise given an expanding trade deficit, which is projected to account for 3.5 % of total exports.

However, foreign currency supply and international market factors have continued to help relieve the pressure on the exchange rate. In particular, the supply of U.S. dollars from foreign indirect investment sources (mergers and acquisitions) and foreign direct investment has been on the rise.

Secondly, the Bloomberg Dollar Index has constantly gone down, easing the pressure on the exchange rate between the Vietnam dong and the U.S. dollar. Thirdly, the Fed’s interest rate hike has not yet placed any short-term pressure on the exchange rate.

In the long run, the Fed’s additional interest rate hikes will put the exchange rate under huge pressure. The strong fall of the Chinese yuan will leave big impact on Vietnam’s economy whose trade deficit with China has been steadily widening, from US$23.7 billion in 2013 to US$28 billion in 2016.

Vietnam’s trade deficit with China makes up 14% of GDP, compared to the U.S.’s 2% with China.

In the 2017 Economic Outlook, HSBC forecast the exchange rate could stay at around VND23,200 per U.S. dollar at the end of this year and remain unchanged until late 2018.

Earlier, State Bank of Vietnam deputy governor Nguyen Thi Hong told the media: “Exchange rate control is a tough task for any central banks in the world but it is far more difficult for us as dollarization in the economy still exists. In fact, exchange rate volatility results from both economic and psychological factors. Expectations can fuel the hoarding of foreign currency.”

NFSC said the task of stabilizing interest rates in the rest of 2017 would be more challenging than in 2016. There are some reasons behind this.

Expectations of higher inflation and exchange rates are building up over the prospect of the Fed raising U.S. interest rates at least three times this year.

Bad debt which has not been thoroughly settled will hinder any effort to cut interest rates, so deposit rates may surge beyond the levels recorded last year. Moreover, credit institutions will have to cut the proportion of short-term funds used to make medium- and long-term loans to 40% from January 1, 2018.

To keep lending rates as stable as in 2016 when the average spike was only 0.1 percentage point, it is necessary to speed up the settlement of bad debt and the restructuring of banks. Recent policy moves demonstrate the Government’s strong determination to move on with a draft law that supports the restructuring of banks.

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